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JP Morgan to pay $1.9 billion for role in Madoff scandal

Updated
January 08, 2014 13:20:00

He is already serving an impossible jail sentence of 150 years, but five years after his conviction, Bernie Madoff is still causing shockwaves across the world's largest financial institutions. The latest to feel the pain from the actions of the fraudster is the richest bank in the United States, JP Morgan Chase. It has agreed to pay $1.9 billion to victims of Madoff's giant fraud, for essentially not doing anything about the crime.

SIMON SANTOW: He's already serving an impossible jail sentence of 150 years, but five years after his conviction Bernie Madoff is still causing shockwaves across the world's largest financial institutions.

The latest to feel the pain from the actions of the fraudster is the richest bank in the United States, JP Morgan Chase.

It has agreed to pay $1.9 billion to victims of Madoff's giant fraud, for essentially not doing anything about the crime.

Here's business reporter Pat McGrath.

PAT MCGRATH: For a bank that earned a $US 20 billion profit last year, a penalty of less than $2 billion may not seem particularly severe. But it's been delivered with some stinging language from New York prosecutor Preet Bharara.

PAT MCGRATH: The global bank, which has operations in Australia, has admitted to failing to properly scrutinise the behaviour of the man who has undoubtedly become its most infamous customer.

PREET BHARARA: Bernie Madoff was able to launder billions of dollars in Ponzi proceeds, essentially through a single set of accounts at JP Morgan. And as far back as 1998, a bank fund manager concluded that Madoff's returns were "possibly too good to be true".

PAT MCGRATH: It wasn't until the US sub-prime mortgage meltdown of 2008 that the bank finally decided to act.

PREET BHARARA: And JP Morgan decided to dramatically reduce the exposure of its own London trading desk to Madoff's funds and so all of this is why today we are filing criminal BSA (Bank Secrecy Act) charges against JP Morgan and it is why the bank is admitting responsibility for its conduct and agreeing to forfeit $1.7 billion to help make Bernie Madoff's victims closer to whole.

PAT MCGRATH: Prosecutors say it's the biggest ever forfeiture for a US bank.

All the money will go to Bernie Madoff's victims, who together lost an estimated $65 billion in his fraudulent investment company, which operated a Ponzi scheme.

Under the scheme, new investors' money was used to pay out returns to existing clients, leading to an ill-fated spiral that culminated in Bernie Madoff's conviction in 2009.

He's less than five years into a 150 year jail sentence, and his family was forced to compensate victims to the tune of $17 billion.

As for JP Morgan, it's been forced to top up its legal defence fund today after paying out more than $20 billion for its role in a series of scandals.

In November it paid $US 13 billion for its role in the selling of sub-prime mortgage assets, and it was also fined last year for attempting to fix inter-bank lending interest rates in the UK.

Corporate law academic Timothy Spangler from UCLA thinks the message is starting to get through.

TIMOTHY SPANGLER: Investment banks and other financial institutions who find themselves even around the outside of fraud, not at the core of the fraud, could be held liable for breach of their legal and fiduciary duties. So I think it sends a powerful, powerful message to Wall Street and also to international financial institutions doing business in the US which would be subject to the same laws.

PAT MCGRATH: But he sees something of a missed opportunity in the fact the case didn't go to trial.

TIMOTHY SPANGLER: Clearly a trial in open court where there is discovery and evidence, there's testimony and cross examination can be a very, very effective way of putting information out into the public.

We don't have that here. We have a deferred prosecution agreement, we have a settlement. So we're not going to have that same access to information and that same debate over precisely what happened.

PAT MCGRATH: Do you think though if this had gone to trial that the prosecutors may have been able to secure a stronger penalty or a criminal conviction or something that would have served as a greater deterrent?

TIMOTHY SPANGLER: There's always that possibility, there's always that possibility. This was the result of a negotiation. I think that's clear and is important for all the listeners to understand this was the result of a negotiation. So not quite what the prosecutors would have hoped for, not quite what JP Morgan would have hoped for.

Any time you walk into a court room there's always the possibility that you could have gotten more than what was agreed today. But with that comes a counter balancing possibility that you would have gotten less.

SIMON SANTOW: Timothy Spangler from the UCLA Law School ending that report from Pat McGrath.